Program & Services

Using Credit Wisely

The Wise Use of Credit

If used carefully, credit can be a helpful tool. For example, most people now use credit to purchase a home. They don't try to save up to pay for it all at once. This makes good sense. The home provides a place to live. It may increase in value and the mortgage interest offers a tax deduction. Credit may also help you deal promptly with costly emergencies.

Many people use credit for unexpected home or auto repairs, or they use credit for medical emergencies. Credit also offers convenience and peace of mind. For example, you don't need to carry large amounts of cash when shopping or traveling.

However, there are some draw backs to credit use. Credit can be expensive. There are high interest rates, and there are finance charges, annual fees and penalties. These can increase the cost of the items you buy on credit. It is also easier to spend too much on credit and having too much credit debt gets thousands of people into financial trouble every year.

It is possible to have the best of both worlds. Design a spending and savings plan so you know how much credit you can afford. Compare the cost of credit and shop around for the best deals.

Here are a few more tips:

Keep your charge receipts in an envelope and put the total on the outside. Are the total charges more than what you have planned for? You may want to stop charging for a while.

Save every month for the usual expenses. That way you won't need to use credit for those. Or, you can pay off the balance in full if you do charge them.

You don't need more than one or two credit cards. It's much easier to keep track of your charges with just a couple of cards, and it's better for your credit record.

How much debt is ok?

As a rule, no more than 15 percent of your net (take home) pay should be going towards unsecured debt payments each month. One way to figure out how much credit you can afford is to make a budget. Deduct your monthly savings and living expenses from your take home pay. What is left is the most you should have going to paying off debt.

Shopping for Credit

You need to decide how you plan to use credit so you can compare different offers. There is a difference between a charge card and a credit card. Charge cards must be paid off every month. If you pay only part, your account will be "delinquent". It will reflect badly on your credit report. A credit card allows you to carry a balance for as long as you want, as long as you make the minimum monthly payment.

Do you pay off your credit card bill every month? Then shop for a low annual fee. Do you want to carry a balance? Then look for a low interest rate. Shop for a grace period. This is the amount of time after your purchase during which there are no finance charges. Some companies give you up to 30 "free" days. Other card companies start the finance charges the moment you make the purchase.

Don't be caught off guard by late and over limit fees! There have been changes in the rules. Credit card companies can now charge big fees to you for being late or over your limit.

Are you just starting out? Or do you have a bad credit history? You may be able to obtain a secured credit card. A secured card works just like a regular credit card except that you deposit money in the account. This is usually between $250 and $500. If you miss a payment, the company takes the money owed out of your deposit.

The rates on a secured card are often higher than on a regular card, but it works the same as a regular credit card, and it helps you build your credit record. Try to find a company that doesn't charge an application fee and confirm that the company will report your performance to at least one of the three major credit reporting bureaus. This is the only way you can get credit where credit is due!